How to Protect our Option and Avoid Seller Monkeying Around with my Buyers - Posted by messerb

Real Estate Investing
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Posted by phil fernandez on March 24, 2000 at 10:07:46:

Hi Monique,

Yes it will protect your straight option. With a lease/ option, you really have two different pieces of paper. One the actual lease and the other being the option.

I think, as Jim mentions in his Feb 17 post, that it would be remote that the bank would even notice this recorded memorandum of option. Even if they did see it, 99.99% of the time they would not act upon their rights pertaining to the DOS. As long as the payments are current. The bank likes to have performing loans, they don’t want to own real estate.

I also agree with Jim about the performance mortgage.

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How to Protect our Option and Avoid Seller Monkeying Around with my Buyers - Posted by messerb

Posted by messerb on March 24, 2000 at 07:14:59:

We had not been exposed to options before the CRE Online conference. I’m so excited that we found our first option deal. We’ve come to general terms with the seller over the phone on how we can both win. Now, we just need to visit the inside of the home and work up the agreement. Here’s my new-to-options question:

How do we ensure that our seller doesn’t try to sell directly to a buyer that we bring to the table?

  • We’ve discussed an option price of $180K for the home.
  • Based on comps, it should sell for $215K - $220K.
  • Since the seller has not yet moved, it is quite possible that the seller will meet our prospective buyer. (I can now see another reason why optioning vacant homes is preferred, particularly when the owner is out-of-town.)
  • What prevents the seller from going directly to our buyer and selling it to them for $200K?

I’ve seen Jim Piper’s posts about a Performance Mortgage. (BTW, I don’t recall Ron LeGrand’s Lease Option course covering Performance Mortgages. I’ve learned alot from LeGrand’s tapes, nonetheless.) Would a Performance Mortgage protect our option in this scenario?

Thanks in advance!
Monique

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Re: How to Protect our Option - Posted by JPiper

Posted by JPiper on March 26, 2000 at 05:03:43:

Monique:

Let?s draw a few distinctions here.

When you say you have an ?option?, I?m assuming this option is relatively short-term, meaning it?s duration is probably weeks or months. On the other hand, a lease/option could conceivably run for several years. To me this would have an impact on what I wanted to record.

First choice for me on a ?lease/option? would be the performance mortgage. In this situation this document would insure that any subsequent liens by the seller would fall after your recorded mortgage (other than liens like property taxes or IRS liens). Further, the profile is lower for DOS issues, if any. It also creates a method to obtain title if the seller were to balk several years down the road. Down the list in importance is the issue of protecting your deal from the seller and buyer getting together?although this is certainly a result of recording it.

For an option though that will elapse within a few weeks or a month or two?.I think the performance mortgage is overkill. It DOES accomplish what you are suggesting, but in all probability is unnecessary in most cases. What would make some sense to me would be recording a memorandum (which by the way does not need to be signed by the seller). Here, DOS issues are not particularly important?the odds of the lender checking title, deciding to accelerate, providing notice, and then accelerating all within a couple of months are EXTREMELY LOW. Unlikely. Your whole goal I presume is to market the house, find a buyer who pays cash or gets a loan for the cash, with which you will exercise your option and close so to speak. The loan is going to be paid off?.unlike the lease/option, which may have ongoing due on sale concerns over a period of years.

What is more likely is that the buyer may try to go around you and speak directly with the seller (or vice versa). The memorandum will cloud the title?.and while it isn?t necessarily perfect, in most cases would be sufficient protection for your option. Recording a memorandum is going to be a whole lot easier to implement than recording a performance mortgage.

JPiper

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Re: How to Protect our Option and Avoid Seller Monkeying Around with my Buyers - Posted by Ed Copp (OH)

Posted by Ed Copp (OH) on March 24, 2000 at 10:13:55:

Monique, SLOW DOWN. First of all let me ask where did you ever get the idea that you bring your prospective buyer to the table. In the case of the option you are the buyer and the homeowner is the seller, that is it… Now you purchase “your” option from the seller and that is the end of the first transaction. You now have something to sell (an option) to your prospective buyer. You and your prospect will negotiate this transaction and hopefully you will make a nice profit. My point is this the homeowner and the prospective new buyer should never be “at the table” for any reason. If they ever get together before you have an option signed…well just what would they need you for? One thing at a time, slowly and carefully; and it will work fine…ED

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Re: How to Protect our Option and Avoid Seller Monkeying Around with my Buyers - Posted by phil fernandez

Posted by phil fernandez on March 24, 2000 at 08:18:42:

A performance mortgage would protect your interest in your lease option deal. Also record a memorandum of option agreement. This will cloud the title.

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This clears things up! - Posted by messerb

Posted by messerb on March 26, 2000 at 07:16:41:

Jim,

Thank you for bringing clarity to a previously confused mind!

The option will be a short-term option, without the right to lease/sublease. After we get the option agreement signed by the seller on Monday, we will record a Memorandum of Option. I’ve found a “Memorandum of Agreement Concerning Real Estate” in my LeGrand course materials. While I will have to modify the language to say “option to purchase” instead of “agreement for purchase,” I see that it does not require the seller’s signature.

This is ideal … keeping it simple!

Thanks again, Jim!

Monique

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Re: How to Protect our Option and Avoid Seller Monkeying Around with my Buyers - Posted by B.L.Renfrow

Posted by B.L.Renfrow on March 24, 2000 at 12:34:48:

I think her comment about bringing a buyer to the table was speaking figuratively, in the context of the closing table, not the seller’s kitchen table!

Of course, you are technically correct, but it is not reasonable to assume that Monique’s buyer is going to purchase the option without examining the property. Naturally, the buyer is going to want to look it over before they agree to anything. In the ideal world, any property I have an option on is vacant. However, it doesn’t always work out that way. In some cases, I may ask the seller to leave when I bring a potential buyer around. In others, depending on the people and circumstances involved, I feel the sellers will do a better job than I can of “selling” the property, since they know it better, so I don’t care if they are present.

Yes, Monique, it IS a risk, albeit small, that the seller might try to cut you out of the deal. BUT…your risk can be reduced by using either of the methods discussed below (memorandum of option or performance mortgage). Furthermore, the vast majority of sellers have no idea how to actually pull off the deal even if they wanted to. If I’m taking an option on a property, I usually will then offer it with seller financing with the intention of creating a note, which I will sell at closing. Believe me, there’s not one seller in 10,000 who would know how to do that. Before they ever call me, they’ve probably already tried, without success, to sell it the usual way. The reason I can find a buyer, while they, or their RE agent cannot, is because I will offer something they can’t or won’t: seller financing.

The bottom line here is that if someone really makes an effort to screw you, it probably can be done, but if Monique takes a few simple steps to protect her interest, I don’t think she has a lot to worry about.

Brian (NY)

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Does it matter that it’s an option, not a lease option? - Posted by messerb

Posted by messerb on March 24, 2000 at 08:48:48:

Phil,

Thanks for your response. Will this protect our interests even though it is a straight option, not a lease option? (I can only guess/hope yes.)

Also, I just read Jim Piper’s post again from Feb 17 on performance mortgages. While he doesn’t answer my question directly, he does make a comment about not recording the memorandum of option. Here’s his quote:

“Recording an option triggers the due on sale clause. Whether it would be noticed is another question?.but this issue recedes considerably with the recording of a performance mortgage.”

Hmmmm … another perspective.

Thanks,
Monique

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Selling Your Note - At What Discount? - Posted by messerb

Posted by messerb on March 24, 2000 at 20:41:47:

Brian,

Thanks for the great response. It is now clear that the answer is to record the memorandum of option or a performance mortgage. I’ll get both signed by my seller, and record the right document later.

The big awakening from your post was to sell the home quickly with owner-financing. We’re doing this now with a home that we own. I had not considered doing it with a home that we don’t own. I like it!!

When you sell your note at closing, what discount do you generally give up? When I considered selling our note for another home that we own, I called a nationwide note buyer. He quoted a 15% discount for a 90% LTV mortgage with a buyer with solid credit. He would come down to a 10% discount if it were a 65% LTV mortgage. Is this in line with what you’ve seen? If not, do you have any recommendations on a note buyer that needs a lower discount?

Thanks again!
Monique